Case Study — Apartment Building

Apartment complexes will have a large amount of land improvements that qualify for accelerated depreciation.  Qualified land improvements will include, but are not limited to; certain excavation work, storm water systems, asphalt paving, concrete curbs and sidewalks, concrete dumpster pads, dumpster enclosures, gates, fencing, surveilence systems, swimming pools, tennis courts, volleyball courts, basketball courts, other recreation areas, parking lot lighting/dedicated electrical, landscaping, irrigation and fountains.  Interior items of apartment complexes include, but are not limited to; dedicated electrical and plumbing to resident and clubhouse kitchens, dedicated electrical and plumbing to clubhouse office/fitness equipment, dedicated plumbing and electrical to swimming pools/hot tubs, dedicated electrical and plumbing to laundry areas, decorative millwork, decorative lighting, telephone/data systems, video/sound systems, floor coverings and wall coverings.  The best method for identifying all qualified property is the use of a cost segregation study where an engineer and CPA work together to identify and classify all qualified property.

Please note that qualified property, land improvements and personal property are terms used to describe costs in the  real estate that can be written off more quickly for tax purposes.

Apartment Complex Example

• Cost of Property (Excluding land): $11,830,000
• Constructed and placed in service in 2005
  

In this case study done for tax year 2006, the apartment complex had a total cost of $11,830,000, not including land. Through cost segregation analysis, the owner was able to re-classify 20% of the total costs to either 5 or 7 year property and 15% of the total costs to 15 year property. This resulted in a Net Present Value After Tax Benefit of over $570,000. The additional depreciation in the first year of the study was approximately $1,268,000.

The tax savings in the first year assuming a tax rate of 39% was over $494,000.

*Net Present Value is a calculation that shows the combined benefits of a cost segregation study over the remaining tax life of the property. The combined benefits each year are adjusted back to today's dollars using a 7% discount factor. This allows our clients to compare the total benefits in today's dollars to the fee of our services.